There are many reasons why small businesses experience sudden cashflow crunches.
Identify the reason and solve it
If you’re trying to fill your bucket with cash and it’s leaking, it makes sense to plug the hole first before tipping in more water. Find what the problem is and move quickly to solve it.
For example:
External factors have caused a sudden drop in demand
At times, there will be local or global events that happen locally or globally that impact what customers buy, and over which you have no control over. Health crises, earthquakes, floods, technological innovations, and changes in legislation can all impact your sales. Develop a contingency plan covering what to do should disaster strike.
A major customer hasn’t paid on time
Implement stricter credit control and better debt collection procedures. Contact customers to ensure you have the right purchase order and the invoice has been sent to the right person. Check if your contact has gone on vacation and forgotten to
process your invoice (it does happen!).
A rise in the cost of production has eroded your profit margin
Try and source less expensive materials or supplies or decide if you need to raise your price. Monitor your gross profit margin on a more regular basis for any further profit slippage.
Your business overhead has increased Identify specific expenses and see how you can reduce them. Check your net profit margins to spot any disproportionate overhead increases so you can act.
Your business is growing quickly
You don’t have the capacity to fund the growth with your working capital. There’s usually a gap between selling goods or services and getting paid by customers. Meanwhile, there are bills to pay. See if you need to slow down. Don’t accept every new job or order that comes in – select only the most profitable and those that pay on time.
Sales have been slower than predicted
Review your marketing plan and sales campaigns. Alternatively, if you can’t see any future improvement in sales, make sure your business is still viable by going back to your original feasibility plan to see what went wrong.
There may be other causes, such as the loss of a major contract or the purchase of a large asset at the wrong time and — now you need those cash reserves for working capital. In each case, understand the cause and the action you’re taking to avoid repeating the crisis, such as diversifying your customer base or using your cashflow forecasts to time purchases more appropriately.
Find internal funds
Before you look for external sources of funding, see if you can free up cash from within your business, for example:
- Offer customers a discount for early payment or ask them to pay up front.
- Ask customers to pay by credit card now, rather than invoice for payment later.
- Hold a sale of surplus or slow-moving stock to raise cash.
- Ask suppliers to take back excess stock and give you a credit or longer payment terms.
- Sell under-used assets and rent the equipment only when you need it.
- Downgrade or sell vehicles to raise capital and lease them back with monthly payments.
- Reduce your drawings from the business until revenues improve. Your accountant and advisors may be able to suggest other ways to release and cash locked-up in your business
Apply for funding
If you do find yourself in a cash crisis, there are several funding options to consider, ranging from self-financing and loans to finding a business partner. The relative attractiveness of each option will depend on the size of your cashflow shortfall and how long you’re likely to need the cash.
If you need a business loan and have a good credit history, consider a larger line of credit or access to a business loan. If you’re going to need a significant amount of money, you’ll likely have to present a detailed business plan and financial forecast.
Connect with a Coast Capital Business Advisor about how we can help.
Take on investors
A business partner might be a source of capital. There are advantages and potential pitfalls to taking on a business partner, so get expert advice first from your accountant and your attorney; they may also know suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.
Ask family and friends
You could ask family, friends or business colleagues to help out via a temporary or long-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on terms. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.
Find new revenue streams
Go back to old customers to see if you can reignite sales and approach existing customers to re-order. Explore all sales leads and options to sell that in the past may not have seemed viable.
Next steps
- If the market has changed, you may need to create new products or services based on customer feedback and market trends — though you’ll need the time and money to execute.
- Consider using online marketplaces such as Amazon, eBay, or Etsy to expand your reach.
- Find partners or form strategic alliances that may help on sell your products and services. Collaborate with these complementary businesses to create bundled offerings or co
branded products. - If you have underutilized equipment, space, or other assets, consider renting or leasing them to generate additional income.
- License your intellectual property — such as patents, trademarks, or proprietary processes — to other businesses.
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This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
